Canada is losing its competitive edge and firms must spend much more on research and development, new machinery and equipment to increase worker productivity, a top banker said Tuesday.
Tiff Macklem, senior deputy governor of the Bank of Canada, said weak exports to our traditional markets have seen our trade balance hit minus 4.3%, the lowest in 20 years. While much of that can be tied to the rising Canadian loonie, about a third is linked to our growing lack of competitiveness.
"From 2000 to 2009, China increased its share of U.S. imports from 8% to 19%, surpassing Canada as the largest exporter to the U.S. Over the same period, Canada’s share of U.S. imports fell from 20% to 14%, with two-thirds occurring since 2005,” Macklem told an event organized by Productivity Alberta, a government group.
While foreign competitors have become more efficient, Canada’s labour productivity has grown at an average annual rate of just 0.5% since 2005, compared with 2.1% in the U.S.
And our failing ability to sell our goods to others could have a major impact on a national economy that has been recovering this year thanks to steady consumer spending.
But with ratio of household debt to disposable income now at a record high of 148%, surpassing the U.S. figure, this spending will moderate in 2011 and industrial spending is expected to fill the gap.
Macklem said all indications are that firms will invest heavily this year, with investment growing at 9%. And a recovering global economy should help boost exports.
"Nevertheless, competitiveness challenges are likely to mean that Canada will benefit less from improved global demand than in past recoveries," Macklem said.
And labour productivity growth should rise from 0.6% in 2010 to 1.1% in 2012.
"At best this will stop the slide in our relative productivity performance. Making up lost ground will require superior performance," he added.
Canadian businesses on average invest less in machinery and equipment, and information and communications strategy, than their U.S. counterparts. Between 1987 and 2009, Canadian investment per worker in machinery and information was 77% and 59%, respectively, of that invested in the U.S.
Canada’s poor productivity performance is not a new story, but it has been particularly weak in recent years, says Macklem.
"And this now risks holding back the recovery if competitiveness challenges restrain net export growth. As stretched households in Canada pull back and government stimulus unwinds, business investment and net exports must play bigger roles in driving growth."
And counting on a much-weaker dollar in the future to regain business competitiveness "looks like a risky business model.
“Business needs to get on with investing and turning these investments into lower unit labour costs and improved competitiveness," Macklem said.
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